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News and Media

30 January 2015

Pensions Perspective: If I retire before April 2015 can I still continue to contribute to my pension?

I have a client who is looking to start a gradual phase into retirement from July 2015, by supplementing employed earnings with pension income. However, his company still remains profitable and he wishes to have the option of making pension contributions when possible. I understand that retiring in July 2015 will restrict the ability to make pension contributions. However, if he retires before April he can carry on making contributions. Is this true? The scheme is 50% property-based with the remainder in discretionary funds. Would we need property valuations to be completed in order for the member to retire?

Members who designate for the first time on or after 6 April 2015 will designate into a flexi-access drawdown fund, and once income is taken the new money purchase annual allowance rules will be triggered.

If a member triggers the money purchase annual allowance rules then they will only be able to contribute a maximum of £10,000 into their money purchase pension plan. Exceeding the money purchase annual limit of £10,000 will result in annual allowance charges being applied on the excess funds.

Members who trigger the money purchase annual allowance rules cannot use carry forward relief. For some members, this could result in valuable carry forward allowances being lost. A member who has not used the previous three tax years' contributions could find their contribution allowance reduced from £180,000 to £10,000!

If a member triggers the money purchase annual allowance rules part way through a pension input period, any contributions made before the trigger date are not caught by the new rules, but any further contributions will be caught.

However, members who crystallise benefits after 6 April 2006 and before 5 April 2015, and have existing capped drawdown funds, will not trigger the money purchase annual allowance rules while they remain within current pension limits. Once members draw in excess of capped drawdown limits, the restricted contribution allowance of £10,000 will apply.

In addition, those members who took capped drawdown between 6 April 2006 and 5 April 2015 and who then crystallise additional funds to their existing capped drawdown arrangement after April 2015, will still retain the full annual allowance. These members would retain the current capped drawdown rules, i.e. 150% of the GAD limits, three-yearly reviews before age 75, and annual reviews after age 75.

For clients over 55 who have not yet crystallised funds and who wish to retire in the next few years, but who also wish to continue contributing to their pension, crystallising a small proportion of the fund, prior to April 2015, would provide the flexibility to take benefits and retain the higher annual allowance.

So, in your example, provided that your client is aged 55 or over, it would be possible to make a small designation to secure a capped drawdown pot. This would enable a member to continue to contribute up to the current annual allowance, plus any carry forward, while still being able to draw an income up to the GAD maximum of the funds crystallised.

Each provider/scheme will have their own restrictions on the minimum that can be crystallised and their requirements for valuation purposes. HM Revenue & Customs provide strict guidelines regarding property valuations, and the scheme needs to ensure that it can sustain any designation. However, for small designations, the provider may be willing to earmark assets and base calculations on the non-property assets that are more easily valued. You would need to contact your provider and confirm their requirements.

As always there are a few points worthy of note.

Members who also have a defined benefit scheme will retain an annual allowance of £40,000, although only £10,000 of it can be paid into a money purchase scheme. In addition, any unused relief can still be carried forward for use within a defined benefit scheme.

For clients who designated funds prior to April 2006 and have since built up crystallised funds within the scheme, it is not possible to designate funds that are post A-Day to the pre A-Day pension pot. In order to take advantage of retaining the higher annual allowance after April 2015, clients who have uncrystallised funds and pre A-Day crystallised pots will need to designate a new post A-Day capped drawdown pot prior to April 2015.

The money purchase annual allowance could be triggered by a member taking benefits from other pots after April 2015. Taking a small pension pot as an uncrystllised funds pension lump sum (UFPLS) for ease of administration will result in the money purchase annual allowance rules applying to other pensions.

As covered in a recent Pensions Perspective, current flexible drawdown rules dictate that no relevant contributions can be paid to any money purchase arrangement (other than a cash balance arrangement) relating to the member under a registered pension scheme in the tax year in which the declaration is made. From April 2015 anyone currently in flexible drawdown will automatically trigger the money purchase annual allowance rules, allowing contributions of up to £10,000 to be paid.

Pension Perspective is a weekly feature from City Trustees, covering questions that our experienced sales and technical teams have received from advisers. The Q&A covers a range of subjects including property, pension contributions, protection, auto-enrolment and more.

City Trustees operates a free technical helpline for advisers for support with pension challenges. Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk.